This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best In all thehistory of the stock market, has there ever been a better investor than Goldman Sachs?

Well... actually... yes. Warren Buffett springs to mind, for example. And judging from the numbers we've dug up on Goldman Sachs' historical performance, this banker isn't exactly the bees knees when it comes to picking winning stocks, either. Nonetheless, an upgrade or a downgrade from Goldman does have the potential to move markets, and that's why today we're going to take a look at a couple stocks Goldman says it likes... and a few more it doesn't.

Calling the "pot" black First up: PotashCorp (NYSE: POT) . In an "initiation of coverage" note yesterday, Goldman cited "production curtailments amounting to about 15% of annual capacity and broad-based inventory destocking" as indicative that potash prices are "approaching a trough." According to Goldman, now begins a "multi-year" period in which PotashCorp begins to outperform the S&P 500 consistently. According to StreetInsider.com, which reported the rating, Goldman is setting a $46 price target on PotashCorp stock, and predicting 15% profits within a year.

Personally, I think that's a bit aggressive. Right now, PotashCorp is selling for more than 15 times earnings, but only expected to grow these earnings at about 3% per year over the next five years. As a general rule, it's not a great idea to go around paying double-digit P/E ratios for single-digit growers. As a result, I'm calling shenanigans on Goldman's PotashCorp endorsement. It just doesn't hold water.

Be that as it may, Goldman is forging right ahead with a second fertilizer endorsement this week, predicting that "the estimate revision cycle is inflecting" for PotashCorp archrival Mosaic (NYSE: MOS) as well. Arguing the Street underestimates the company's "phosphate earnings power," and citing the same reduction in inventories that it sees working to PotashCorp's benefit, Goldman thinks investors should be "aggressive buyers" of Mosaic stock today, before the turnaround becomes apparent.

Again, I disagree. At more than 13 times earnings, but only 8% projected earnings growth, Mosaic poses the same problem faced by PotashCorp bulls: the prospect of paying double-digit P/E ratios for single-digit earnings growth. Now granted, Goldman says these numbers are irrelevant, because the economics of fertilizer is about to turn, and Mosaic will grow faster than anyone else expects. But how good has Goldman been at calling these kinds of "inflection points" in the past?

Survey says...Turns out, not very good at all. On CAPS, we've been monitoring Goldman's performance in the chemicals sector for upwards of six straight years now. Over that time period, Goldman has twice recommended buying PotashCorp, and twice recommended buying Mosaic. It's been wrong all four times. (Don't believe me? Here. See for yourself).

Now, on the other hand, one thing Goldman has been a bit more accurate about in the past, is its picks of nitrogen fertilizer makers -- and as it just so happens, Goldman's got a few things to say about those this week, as well.

You see, at the same time as Goldman was throwing its support behind PotashCorp and Mosaic, it was panning the prospects of nitrogen specialists Agrium (NYSE: AGU) and CF Industries (NYSE: CF) . (Strangely, peers Rentech (NASDAQ: RTK) , and its most important subsidiary, Rentech Nitrogen Partners (NYSE: RNF) , seem to have escaped Goldman's notice for the time being -- but I suspect they'll get around to panning those to as well, presently).

According to Goldman, nitrogen "fundamentals" have peaked, and there's little "potential for improved execution/margin upside" left at either Agrium or CF. Predicting higher natural gas costs in 2013, and lower ammonia/urea prices, Goldman sees CF profits coming in 14% below consensus in the coming year. Consequently, Goldman is advising its clients to go neutral on Agrium, and sell CF.

There may be something to this advice. At nearly 12 times earnings, Agrium shares do look overvalued relative to the sub-6% growth prospects that Street analysts assign to the stock. CF, meanwhile, sells for 7.6 times earnings. That looks even more overpriced relative to "growth" rates that, at less than 2%, are projected to actually fall below the rate of inflation.

Foolish takeawayTo sum up, when Goldman tells you to avoid companies that focus on selling nitrogen as crop fertilizers, that's some advice worth listening to. Truth be told, each of Agrium, CF, and Rentech looks expensive, and I wouldn't touch any of these farmers' helpers with a 10-foot hoe at today's prices.

On the other hand, neither Mosaic nor PotashCorp appear to offer much more safety -- at least not according to the numbers we're seeing them report today.

If it's a decent play on fertilizer you're looking for, I think the only stock really worthy of consideration right now is Rentech Nitrogen -- the subsidiary of Rentech proper. That one's growing at 12%, selling for 15 times earnings, and paying a very attractive dividend yield of 8.7%. Even if Goldman's right about the poor prospects for nitrogen going forward, Rentech Nitrogen looks to offer a big enough margin of safety to be worth the risk.

Did the 8.7% dividend yield at Rentech Nitrogen get your attention? Do you like big dividends in general? If you're looking for more long-term investing ideas, let me invite you to read the Fool's brand-new special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

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Here's the problem with so called experts like Goldman and Dalmon Rose etc always downgrading the nitrogen companies - they and the USDA have so far been wrong 3 years in a row. For some reason they ignore the fact that nitrogen / ammonia MUST be used every year and CANNOT be diluted. This is because N likes to be a gas and leaches out of soil quickly. It leaches out of very dry soils even faster...seems to me we have had some pretty bad drought the past year...or did everyone forget this so soon. Also most of the N companies - except for UAN - have to do maintenance shutdowns this year thus the supply of N fertilizers is going to remain tight - as it was last year - that's why MOS had to buy much more expensive ammonia from Russia - ammonia is needed to process the phophorous and potassium. Also this talk of nat gas going up is a red herring as even at $4 N fertilizer companies were making tons of money plus all of them now have mostly locked in their nat gas well below 3.50. In fact some are as low as 2.28, Also the CEOs of RNF and UAN from their fwd sales have estimated that ~ 96 million acres of corn will be planted in the USA in 2013 - plus they may need to plant even more since the USA EPA refuses to back off on the new 15% ethanol from corn. From AGU CEO comments last Q the phosphate and potash will indeed slide in price. These 2 stay in the ground as they like to be solids so re-application need only be done every 2 years. It's a simple case of chemistry that these experts constantly ignore or they just don't know. Also ammonia is rather unstable and not that easy to store...as such it won't be over produced...another fact these so called experts also ignore or don't know about. Also CEOs of RNF and UAN have already stated that in 2013 their distributions will be going up. I believe the UAN one is going up ~ 50 cents a share. People would be well advised to go READ the companies' reports carefully rather than take the word of experts who haven't been right the past 3 years.